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Thursday, December 26, 2013

MKH Berhad - Deeply Undervalued

Source: http://klse.i3investor.com/blogs/kenangaresearch/43925.jsp

INVESTMENT MERIT

Kajang-based property developer with strong earnings track record. MKH Berhad (MKH) is a fundamentally strong property developer with a solid 19 years track record of profitability since its listing in 1995.

High exposure to the affordable housing segment. We gather that most of MKH’s housing projects are located in Kajang mainly offering affordable units priced below RM600k/unit. This should place MKH in a good position as we believe developers with significant exposure in affordable housing should fare better under the current economic scenario.

FY13 core net profit surged 60% YoY to RM123m. This is mainly due to strong performance from its Property Development & Construction (PDC) division in which PBT jumped 69% YoY to RM143m. Plantation division core PBT also increased to RM24m (from last year’s RM5m). We have excluded the impact of unrealized forex loss and a gain on asset disposal (RM31m) in the plantation division.

Plantation segment likely to be profitable in FY14. MKH has planted in total 14,400ha of oil palm estates in East Kalimantan out of which 13,900 or 97% are already matured and producing FFB. We reckon that MKH is poised to deliver minimum 15% FFB growth in FY14 due to better yield produced by maturing trees. Overall, this should translate into better earnings in the plantation division.

Trading Buy with a TP of RM3.05. Our fair value of RM3.05 is based on a 35% discount to our SoP RNAV of RM4.69, implying 1.02x PBV on FY14E BV/share of RM3.00 or 7.1x FY14E PER. On PER basis, the valuation is close to the small-mid cap property companies’ average Fwd PER of 8.0x.

TECHNICALS

Resistance: RM2.85 (R1), RM3.05 (R2)

Support: RM2.50 (S1), RM2.39 (S2)

Comments: The share price has been trading at range bound over the last six month between RM2.39-RM2.85. Formation of bullish white candles in the next few days could confirm the “Hammer” pattern for a potential positive rebound towards previous high @RM2.85. Beyond that, RM3.05 is the next target, based on measurement objective.

BUSINESS OVERVIEW

MKH Berhad (formerly known as Metro Kajang Holdings Berhad) is a respected and established property developer with a reputation for costeffective and well managed projects. Its current portfolio comprises a

range of developments across all property sectors which are mainly located in Kajang, Damansara, Semenyih, Serdang and Melawati. To date, it has developed and undertaken more than 30,000 units of mixed development projects with a value exceeding RM6.0 billion. In addition, MKH is also involved in oil palm plantation, project management, property investment, construction and furniture manufacturing.

BUSINESS SEGMENT

Property development and construction: This segment includes property development, building and civil works contracting.

Trading: Trading in building materials and household related products and general trading.

Hotel and property investment: Hotel business and property investment and management.

Manufacturing: Furniture manufacturing.

Plantation: Oil palm cultivation. The group has planted in total 14,400ha of oil palm estates in East Kalimantan.

SWOT ANALYSIS

Strengths: High exposure to affordable housing segment should translate into sustainable demand for its product.

Weaknesses: High concentration of projects in Kajang. However, it has already started to venture out of Kajang with projects such as Hill Park Shah Alam and Pelangi Semenyih.

Opportunities: Maturing plantation estate to provide new source of sustainable income.

Threats: Negative policy affecting property buyers/investors.

Source: Kenanga

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